Best Rental Tax Deductions for Landlords
Landlords manage a variety of expenses and payments throughout the year. When tax season approaches, it can be challenging to organize these records for the IRS.
The tax code outlines numerous tax deductions for landlords, especially in the sub-category of operating expenses. However, you can only take advantage of these deductions if you know how to get them.
If you haven’t done so recently, it’s a good idea to review the tax code. Research the types of deductions you qualify for based on the type of rental business you own and your tax classification.
Here is some basic information about popular rental property deductions, as well as tips for ensuring you qualify.
Landlord Tax Classifications
To qualify for the most deductions, you need to be classified as a business owner for tax purposes. According to the IRS, a business owner is a landlord who earns a profit by actively running a rental business.
Your tax classification is determined by your behavior and motive. If your business makes a profit, you are automatically a business owner. However, you can still be classified as a business owner even if you don’t make a profit. You just need to demonstrate that you or someone you hired invests continuous, regular time into running your business.
If you don’t meet these requirements, you could be considered either a real estate investor or not-for-profit activity. These tax classifications can’t use business-only tax deductions.
Be sure your rental activities qualify as a business before you proceed with tax deductions.
Best Deductions
Once you’ve verified that your business qualifies, you can pursue any deductions for rental business owners. Here are a few:
Repairs
Repairs, like any operating expenses, are currently fully deductible. To classify as a repair, the activity must be ordinary, necessary, and reasonable in amount. Any maintenance that involves general upkeep, preventative care, or replacement of parts is a repair.
If the activity permanently improves a building or building system in some way, this is considered a capital investment and improvement. Improvements are not currently deductible.
Home Office Expenses
Any expense related to your home office is deductible from your taxable income. This includes the space you use to manage your business, the supplies you use, and any insurance or interest you pay on renting the space.
If your home office is a shared space (i.e., you also use it for personal reasons), you can only deduct a percentage of expenses.
Travel Expenses
Under the current tax code, you may deduct any expenses related to business travel, such as gas, vehicles, and auto upkeep. You may also deduct airfare, hotel expenses, and meals, although the IRS will scrutinize these expenses more heavily.
Rental Insurance
Many landlords purchase rental insurance to protect against natural disasters like floods or fires. If you have rental insurance, you may deduct the amount from your taxable income. You may also deduct any other landlord or employee insurance you buy.
Deductions vs. Depreciations
Classifying maintenance activities can be a tricky task for landlords looking to use deductions. A maintenance activity can only be deducted when it’s classified as a repair. Improvements are capital improvements that must be depreciated over several years. Repairs and improvements are listed separately on Schedule E.
Examples of common repairs include repainting a unit, replacing broken shingles on a roof, fixing a leak, or refinishing wood flooring.
Improvements involve betterments (addition to a Unit of Property’s value), adaptations (changing a UOP for a new use), or restorations (significantly prolonging the UOP’s life). For instance, installing an outdoor kitchen and purchasing new equipment are improvements.
Tips
Repair deductions are significantly better for landlords than depreciated improvements. Here are a few tips for ensuring your activity qualifies as a repair:
- Do preventative maintenance. Preventative maintenance is always an operating expense, and thus always deductible.
- Document tenant complaints. Keep evidence that something was broken.
- Get separate invoices for combined tasks. If a vendor performs a repair and an improvement, get separate invoices for each.
- Supervise invoices for the correct terminology. Be sure your vendor describes the task as a repair, fix, or recondition rather than a replacement, remodeling, or upgrade.
- Delay large repairs until after a building is in service. Repairs made before a building is ready to rent are not deductible.
- Use property management software. The top property management software includes all the features you need for a successful tax season: expense tracking, automatic reporting, revenue metrics, and more. These tools help you consolidate and organize all the data you need to file with the IRS. The maintenance management feature also helps you prove that an appliance was broken and needed repair.
Master Rental Tax Deductions
Tax deductions are highly profitable for rental property owners. By reviewing the tax code and the tips above, you can leverage tax deductions to save money in your rental business.
